My recent comments about the performance of retirement accounts elicited a wave of comments from Vanguard investors about poor stock market returns. Here are a few thoughts in response.

Several investors noted that we’re living in unique times, with no historic parallel. I believe, though, that there’s a rough parallel with the 1930s , when stocks were pummeled by the Great Depression. In our own era, we first endured the collapse of the tech bubble and then the 2008–2009 mortgage system crisis. From the perspective of pure economic misery, the 1930s were by far the worst decade. From the perspective of equity investors, the 1930s were also dramatically more volatile. Yet in the end, both decades ended up with a not unsurprising result: similar, disappointing returns on stocks.

As an example, consider a $100 investment in a diversified stock portfolio on December 31, 1928, and December 31, 1999*. Let’s measure market returns with the S&P 500 Index (i.e., before any investment charges, taxes, or inflation). During the 1930s, a $100 investment would have fallen to $36 by 1932, reflecting the catastrophic effects of the Great Depression (see chart). In the subsequent recovery, that $36 would have grown to $108 by the end of 1936, then fallen another 30%, before ending up at $91 by 1939—a ten-year annualized return of –0.9%.

Stock returns for our current period were much less volatile, in part because the first half of the 2000s was largely the unwinding of a tech bubble, not a macroeconomic crisis like in the 1930s. We had our 1930s-style crisis in 2008–2009, although, because of large responses by monetary and fiscal authorities, we did manage to avoid a systemic collapse. Our $100 invested on December 31, 1999, reached $105 a decade later—for an annualized return of 0.4%.

Now, if, as an investor, you had perfect foresight during the 1930s or the 2000s, you’d have obviously remained on the sidelines and kept your money in cash (or better yet bonds) until the opportune time. (Ah, if we only had the foresight to invest in 1932! I recall the story of an affluent local investor who made his money by buying near-bankrupt utilities in the 1930s.)

But most investors lack such foresight. When you do have it, it’s more often luck than skill. Without any timing skill, “buy and hold” remains a sensible strategy.

Another lesson learned from the 1930s is that of the potential benefits of a balanced portfolio strategy—whether that balance is through high-grade bonds or other fixed income assets. During our current period, as several investors commented in the blog, some balanced investors have eked out low single-digit returns. That’s nothing to write home about. But it’s still some growth from the markets themselves, rather than from saving.

The current mood among many investors is to simply project forward the gloom of the past decade. I’m entirely sympathetic to the psychology of the situation, even though I disagree with it. There’s an overwhelming tendency, seemingly hard-wired into our evolutionary heritage, to overweight recent experience. Some economists even have a term for it: “auto-regressive expectations.” As in, we expect what we have just experienced. The decade has been terrible, and so it will ever be.

My own take is that while the future is always unknowable, there are good odds for decent returns in the coming decade. It’s neither 1999—nor 1983. That’s a sensible reason for holding a balanced portfolio strategy. But I recognize it won’t mitigate the sense of regret and disappointment that come from a long period of weak returns.

* I chose these two years as starting points because stock market returns were first negative for calendar years 1929 and 2000.

Note: All investments are subject to risk. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

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Steve Utkus

Steve Utkus oversees the Vanguard Center for Retirement Research, which studies many aspects of retirement in America—from how individuals start saving and investing in the early part of their careers, to how they prepare for actual retirement, to how they spend down their savings once they’re retired.
Steve is particularly interested in behavioral finance—the study of how rational decision-making is influenced by human psychology. His current research interests also include the ways employers design retirement programs, and new developments in retirement in other countries.
Steve holds a B.S. from the Massachusetts Institute of Technology and an M.B.A. from the University of Pennsylvania's Wharton School. He began working at Vanguard in 1987 and has served as director of the Center for Retirement Research since 2001. Steve is also a visiting scholar at the Wharton School.